We're Hopeful That Aspen Group (NASDAQ:ASPU) Will Use Its Cash Wisely

Just because a business does not make any money, does not mean that the stock will go down. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So should Aspen Group (NASDAQ:ASPU) shareholders be worried about its cash burn? For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). Let's start with an examination of the business' cash, relative to its cash burn.

See our latest analysis for Aspen Group

Does Aspen Group Have A Long Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In July 2021, Aspen Group had US$6.6m in cash, and was debt-free. Importantly, its cash burn was US$10m over the trailing twelve months. So it had a cash runway of approximately 8 months from July 2021. Notably, analysts forecast that Aspen Group will break even (at a free cash flow level) in about 14 months. That means unless the company reduces its cash burn quickly, it may well look to raise more cash. Depicted below, you can see how its cash holdings have changed over time.

How Well Is Aspen Group Growing?

At first glance it's a bit worrying to see that Aspen Group actually boosted its cash burn by 26%, year on year. The silver lining is that revenue was up 34%, showing the business is growing at the top line. On balance, we'd say the company is improving over time. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.

How Easily Can Aspen Group Raise Cash?

Since Aspen Group has been boosting its cash burn, the market will likely be considering how it can raise more cash if need be. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive growth. By comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).

Aspen Group's cash burn of US$10m is about 7.8% of its US$130m market capitalisation. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.

So, Should We Worry About Aspen Group's Cash Burn?

It may already be apparent to you that we're relatively comfortable with the way Aspen Group is burning through its cash. In particular, we think its revenue growth stands out as evidence that the company is well on top of its spending. Although we do find its cash runway to be a bit of a negative, once we consider the other metrics mentioned in this article together, the overall picture is one we are comfortable with. There's no doubt that shareholders can take a lot of heart from the fact that analysts are forecasting it will reach breakeven before too long. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don't think they should be worried. Separately, we looked at different risks affecting the company and spotted 3 warning signs for Aspen Group (of which 1 is concerning!) you should know about.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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